Transocean Icahn Defense Seen With Deal Focus: Real M&A

By Brooke Sutherland -
Mar 20, 2013

Transocean Ltd. (RIG), the offshore oil
driller under pressure from billionaire Carl Icahn to boost its
dividend, would be better off using some of its extra cash on
acquisitions to shore up lagging growth.

Transocean, owner of the Deepwater Horizon rig that
exploded three years ago in the Gulf of Mexico, is projected to
increase revenue more slowly through 2016 than 87 percent of
similar-sized peers, according to data compiled by Bloomberg.
Transocean should use its $5.1 billion in cash -- the most in at
least 22 years -- to pursue a deal that would upgrade its fleet
and improve sales growth, rather than accede to Icahn’s demand
for a larger dividend, Iberia Capital Partners LLC said.

“If you’re trying to do things for your shareholders,
growth is an important part of that story,” Brad Handler, a New
York-based analyst at Jefferies Group LLC, said in a telephone
interview. An acquisition, along with Transocean’s planned
dividend, is “a better long-term solution,” he said.

Transocean, which has a market value of $19 billion, could
obtain more modern rigs and faster revenue growth by buying
Ocean Rig UDW Inc. (ORIG) or Pacific Drilling SA (PDSA), said Cowen Group Inc.
The Vernier, Switzerland-based company could pay as much as $5.8
billion in cash and stock for a takeover without jeopardizing
its credit rating, and even a smaller purchase of a company such
as Vantage Drilling Co. would boost earnings, said Handler.

Icahn Stake

Guy Cantwell, a spokesman for Transocean, declined to
comment on the company’s interest in acquisitions beyond
statements made at an energy conference in New Orleans this week
by Chief Executive Officer Steven Newman.

“We’re open to building or buying, whatever makes the most
economic sense,” Newman said at the conference.

Icahn didn’t respond to an e-mail or phone request for
comment left with an assistant.

The activist is Transocean’s biggest shareholder with a 5.6
percent stake. He disclosed an investment in the company in
January, the same month the rig operator agreed to pay about
$1.4 billion in penalties for its role in the Gulf oil spill.

Icahn then called on Transocean, which had discontinued its
dividend in 2012, to issue an annual payout of at least $4 a
share, or $1.4 billion.

Instead, Transocean’s board proposed this month that the
company reinstate its dividend at $2.24 a share and accelerate
debt repayment, saying a larger payout to shareholders would be
“overly aggressive and detrimental to the company’s long-term
performance.” Transocean said it still faces uncertainties
related to the Gulf oil spill, among other things.

Proxy Fight

Icahn is still pushing for the $4-a-share dividend and is
asking shareholders to support his plan, as well as the election
of three new directors. Shareholders will vote on the dividend
proposals at the company’s annual meeting in May.

Today, Transocean shares gained 1.4 percent to $52.97.

Rather than paying the larger dividend, Transocean should
preserve cash to guard against future liabilities and help make
its rig fleet more competitive, said Trey Stolz, a New Orleans-based analyst at Iberia Capital. The quickest way to get newer,
better rigs is to buy them, he said.

Other deep-water drillers have “upgraded a higher
percentage of their fleet over the last few years and into the
next few years,” Stolz said. “Transocean doesn’t have quite
the same exposure.”

Purchasing a company with more modern rigs would help trim
Transocean’s maintenance costs and allow it to charge higher
rates to customers, according to J.B. Lowe, a New York-based
analyst at Cowen.

Slower Pace

With analysts projecting an average annual growth rate of
5.5 percent through 2016, Transocean’s revenue is poised to
increase at a slower pace than 87 percent of oil and gas
services companies valued at more than $5 billion, according to
data compiled by Bloomberg. In addition, Transocean has posted
net losses the past two years.

An acquisition of Houston-based driller Rowan Cos. (RDC) would
boost Transocean’s per-share earnings by as much as 17 percent
in 2016, Handler of Jefferies estimated in a March 15 report.

Rowan is an attractive target for Transocean because of its
deep-water drilling assets, Handler said. It also offers the
chance for Transocean to gain a foothold once again in the jack-up, or shallow-water rig market, he said.

A takeover of Rowan may cost Transocean at least $5.8
billion, or about a 35 percent premium to its closing price
yesterday, Handler said.

No Surprise

While Rowan isn’t seeking a sale, “it’s not a surprise
that people think of us, at our size, as an acquisition
target,” CEO Matt Ralls said in an interview at the New Orleans
energy conference this week. “If someone wants to come along
and make an attractive offer, we’ll take it to the shareholders.
But we don’t want to see that happen.”

Buying Houston-based Vantage Drilling (VTG) for $655 million
would be more digestible and still raise Transocean’s per-share
earnings by 10 percent in 2014, Handler said. That price tag
would be more than a 30 percent premium to yesterday’s close.

Transocean may be more likely to be lured to pure-play
deep-water drilling companies such as Ocean Rig and Pacific
Drilling to meet demand, Lowe of Cowen said.

“The way the industry has been going for the past five
years is they’re going farther off shore and they’re going
deeper,” he said.

Takeover Values

Lowe said a buyer would have to pay more than his estimated
net asset value of $24 a share for Ocean Rig, at least a 54
percent premium to yesterday’s closing price. Pacific Drilling (PACD)
may lure at least a 33 percent premium, he said.

While an acquisition could help Transocean upgrade its
fleet quickly, takeover targets may demand higher premiums than
the company is willing to pay, said John Keller, a Houston-based
analyst at Stephens Inc. It may benefit the company to hold on
to some of its cash and wait until the market faces its next
downturn, he said.

“I don’t think in a cyclical industry like this that you
necessarily should feel urgency to really expand your fleet,”
Keller said in a phone interview. “My preference would be to
see them invest in growth at returns that make sense, not just
growth for growth’s sake.”

Growth Jumpstart

Still, Handler of Jefferies estimates that even paying $5.8
billion for Rowan’s equity and taking on its $2 billion in debt
to gain its fleet would be cheaper than building the equivalent
number of new rigs. For Transocean, it could be an investment
worth making, he said.

Transocean “needs to focus on longer-term growth
prospects,” Handler said. “Because it hasn’t been able to do
that as consistently as its peers, it needs to jumpstart longer
term growth and that’s where M&A comes in.”